China polyethylene inventories are high

Polyethylene (PE) inventories in China at the second and third local distributor levels are at very high levels, two reliable industry sources have told us.

This has led to some confusion in the market as earlier reports indicated that inventories were in fact low – but this referred to stocks in bonded warehouses (imported material) and the first level of local distributors.

Speculating in polyolefins has been made a great deal easier by lax bank lending – contributing to a 51% rise in imports during January-May 2009 over the same months last year.

The US was able to raise low-density PE (LDPE) exports to China by 27% in January-May and HDPE by a staggering 65% (up until end-March shipments were actually down by 3%, indicating how strong the buying spree has been since then on greater macroeconomic confidence, tight supply on shutdowns and rising oil prices).

We are also hearing reports of government investment in better disaster-preparedness - after the mistakes exposed by last year’s Sichuan tragedy – as being partly behind very tight HDPE yarn grade markets. Yarn grade is used to make tarpaulin for tents with the surface of the tents laminated by linear-low density (LLDPE) and LDPE.

Demand for agricultural film (LDPE and LLDPE) has received a boost from government initiatives to raise output on farms. One of the peak seasons for agricultural film demand is also about to start.

Lack of availability of recycled plastic is another major factor in the surge in demand for virgin resins.

Recently, though, markets have become becalmed due to a classic buyer and seller stand-off.

Are we at one of those inflexion points or could the rally be sustained for some time yet?

I still think this won’t be a V-shaped recovery so it’s only a question of when there is another severe correction in pricing (of course, the same applies to the other polymers. I will look at PP over the next few days).

New supply will become the biggest factor in directing markets, but, according to some sources, perhaps not until as late as Q4 due to continued start-up delays.

But even if the new-output glut doesn’t hit the market until the fourth quarter -or perhaps even late – a collapse in crude might have already flushed the true level of Chinese inventories out of the system.

“The discount for front-month to second-month oil futures has nearly doubled since July 13, to $1.75 from 89 cents,” the report continues.

This shift in the forward curve might be big enough to trigger a new round of buy and store programmes for offshore vessels that were off-loaded in May when the curve moved in the opposite direction.

Bargain prices for very chartering Very Large Crude Carriers (VLCCs), which can help store up to 2m barrels of oil, could revive the offshore storage trend.

But the danger is that one day storage space might simply run out – or before that the cost of storage rises above that of finance. Cheap and easy lending, the result of the US government’s rescue of the banks, is one of the main reasons behind the rise in oil.

Before any of the above happens, the weak state of demand might be enough to topple the market.